Currently, tax rates differ from state to state. GST will bring uniformity, reduce the cascading effect of these taxes by giving input tax credit. Will have a comprehensive tax base with minimum exemptions — will help industry, which will be able to reap benefits of common procedures and claim credit for taxes paid. This is expected to reduce the cost for consumers. Finance Minister Arun Jaitley estimates GST will help increase India’s GDP by around 2 per cent.

Also Read: Centre, states agree on free flow of GST credit on inter-state trade

What is the constitutional status of GST?

Currently, states don’t have the power to levy service tax, while the Centre does not have the power to levy tax beyond the factory gate, i.e. VAT, sales tax, etc. To facilitate this, a constitutional amendment is required. The UPA government brought a Bill in Lok Sabha in 2011, but failed to get it passed. The NDA government introduced a “slightly modified” version of the Bill in Lok Sabha last December. It was cleared on May 6, but for GST to become a reality, the Bill must be cleared by two-thirds majority by both Houses, and ratified by 50% of states. It is now pending in Rajya Sabha.

The government does not have a majority in Rajya Sabha, and the opposition wants the Bill to be referred to a Select Committee, which the government is not keen on. Also, many states do not want to give up their fiscal autonomy. In Budget 2007-08, then finance minister P Chidambaram announced GST’s implementation from April 1, 2010. The empowered committee of state finance ministers led the discussions. Punjab and Haryana were reluctant to give up purchase tax, Maharashtra was unwilling to give up octroi, and all states wanted to keep petroleum and alcohol out of the ambit of GST. BJP-ruled states like Madhya Pradesh and Gujarat took hard positions.Despite the passage of the Bill in Lok Sabha, most of the original concerns of states remain. Gujarat and Maharashtra want the additional one per cent levy extended beyond the proposed two years, and raised to two per cent. Punjab wants purchase tax outside GST.If it is finally passed and ratified, then?

The Centre and states have to frame and pass GST laws — Central GST and State GST — which will provide the framework for the new tax. The IT infrastructure has to be ready before April 1, 2016, the scheduled date for implementation of the new tax. A GST Council will be formed, which will decide on issues including tax rates, exemption list and threshold limit. Sub-groups formed earlier to prepare blueprints for business, payment and refund processes, revenue-neutral rate, threshold limit, dual control and GST laws, have submitted reports. While the National Institute of Public Finance and Policy and sub-group have suggested a rate of 27% for both states and the Centre, the Finance Minister has made it clear this is too high.